Monday, Goldman Sachs (NYSE:GS) downgraded Blue Owl Capital stock from Buy to Neutral and set a new price target of $24.75. According to InvestingPro data, the stock has shown remarkable strength with a 69% return over the past year, though current analysis suggests the stock is trading near its Fair Value.
The adjustment follows analyst observations that Blue Owl Capital's Credit business, which accounts for approximately 60% of management fees post-recent acquisitions, is expected to experience a slowdown in its compound annual growth rate (CAGR).
The anticipated CAGR from 2024 to 2027 is projected at 16%, a decrease from the 24% CAGR estimated for the period from 2022 to 2024. This comes despite the company's strong recent performance, with revenue growth of 32.15% in the last twelve months.
The downgrade is attributed to increasing competition in the retail channel and a reduction in macroeconomic tailwinds. Goldman Sachs also notes that Blue Owl Capital's investment in its business and the rising costs associated with fundraising efforts are likely to maintain fee-related earnings (FRE) margins below the 60% long-term target for the foreseeable future.
The firm's analysts project that these factors will result in earnings per share (EPS) for Blue Owl Capital that fall roughly 6% below the consensus estimates for the years 2025 to 2027. The financial services company's current net debt stands at $2.5 billion, and its active involvement in mergers and acquisitions (M&A) is expected to further constrain the potential for multiple expansions.
Goldman Sachs' new price target of $24.75 for Blue Owl Capital is based on a sum-of-the-parts (SOTP) valuation method. This target suggests a forward price-to-earnings (P/E) ratio of 29 times for the fifth to eighth quarters ahead, after accounting for stock-based compensation (SBC). The revised rating and price target reflect the analyst's cautious outlook on the company's growth prospects and profitability in the coming years.
For deeper insights into Blue Owl Capital's valuation and growth potential, InvestingPro subscribers can access the comprehensive Pro Research Report, which includes detailed analysis of the company's financial health score of 3.18 (rated as "GREAT") and over 30 key financial metrics.
In other recent news, Blue Owl Capital has been exploring the possibility of merging several of its portfolio firms to create a significant industry player, according to the Financial Times. This move is seen as part of the ongoing consolidation in the alternative investment market.
Piper Sandler has raised the price target for Blue Owl Capital to $25, reflecting confidence in the company's long-term growth, particularly its forecasted fee-related earnings growth of over 25%.
In its recent third-quarter 2024 earnings report, Blue Owl Capital announced substantial increases in management fees and earnings, with fee-related earnings of $0.22 per share and distributable earnings of $0.20 per share. The company also declared a dividend of $0.18 per share. The acquisition of IPI has further strengthened Blue Owl's position in the digital infrastructure sector.
Blue Owl Capital also raised $7.9 billion in equity capital in Q3 2024, with $4.2 billion coming from private wealth. The company has revealed plans for product expansion, focusing on digital infrastructure and alternative credit. Among the recent developments, Blue Owl Capital has entered into a $2 billion loan sale agreement with Upstart (NASDAQ:UPST) and set a $1 billion target for the new net lease Europe strategy by Q1 2025.
According to analysts from Goldman Sachs and Piper Sandler, Blue Owl Capital is aiming for mid-20% growth in fee-related earnings for 2024 and 2025. The company anticipates a dividend of around $0.90 for 2025, marking a nearly 30% annual growth rate since going public. However, despite robust performance, Blue Owl Capital did not meet its dividend target.
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